After Covid-19 hit, many employees lost their positions and became freelancers. The change in status comes with new responsibilities, such as filing your taxes. Keeping these differences in mind is crucial while looking for a new job, career change or a side hustle. This knowledge may let you avoid potential fines and even save some money.

Overview

Most people fall into two categories of people: employees and freelancers, or “self-employed”. Employees are hired by a company and their taxes are usually taken care of by the employer. Freelancers work for themselves and file taxes on their own. The differences are not limited to the legal side of the matter: one can avoid fines and even save some money by applying for relevant deductions. As a wise man once said, “knowledge is power”, and “avoiding taxes is your duty; evading taxes is a crime”.

Employees and Freelancers

As stated in the law, an employee (or worker) is someone who has a contract to do work for a reward. A large part of the workforce consists of employed people, roughly 75% as of 2020. Employees pay taxes according to the PAYE system, which stands for Pay As You Go. Generally, an employer takes care of all taxes and an employee doesn’t have to worry about them.

Freelancers are people who regularly sell goods or services to make a profit and take all risks and rewards associated with it. They have to register as self-employed and submit a Self Assessment form yearly. This process may become tedious. On the other hand, one gets strictly punished for errors. To avoid legal problems, save time and money, people often hire one-off consultants. A good professional who will help you figure out subtleties of taxation and related paperwork. 

Tax Rates

Pay As You Earn

PAYE, or Pay As You Earn, is a progressive tax system that the UK uses to determine the tax deducted from your income. There is the same scale for freelancers and employed workers, applied to gross salary:

  • Minimal Allowance, under 12,570 pounds: 0%
  • Basic rate, under 50,270 pounds: 20%
  • Higher rate, under 150,000 pounds: 40%
  • Additional rate, over 150,000 pounds: 45%

This tax is deducted from salary above minimal allowance unless you earn more than 100,000 pounds. In this case, minimal allowance decreases by 1 pound for every 2 pounds you earn above this limit.

National Insurance

For employees, the employer deducts 12% from salary above 9,500 pounds and adds 13.8% from their pocket. This is different for self-employed workers. There are two types of National Insurance:

  • Class 2, earning over 6,515 pounds per year and paying 3.05 pounds a week;
  • Class 4, earning over 9,569 pounds per year and paying 9% on profits under 50,270 pounds and 2% on profits higher than that.

Pension Contributions

These are non-taxable contributions to your pension scheme. The employer usually offers one, but everyone can get a separate provider.

Value-Added Tax

Sole traders pay value-added tax from the goods they sell. This does not apply to employees as they don’t sell any goods or services. Applying for VAT is only mandatory once the sole trader’s turnover exceeds 85,000 pounds a year. There are advantages to paying VAT, even if your turnover is lower. You can claim a VAT return for items you buy for your work, and it’s good for your reputation. But this return is filed more often, once every three months, so be vary.

Legal Side

Deductions

Employees can only apply for deductions related to their work, i.e. the things they had to buy to do the job. The most common example is business trip expenses. For freelancers, tax deductions are applicable for everything you use for your business. This stretches quite far, it’s even possible to get a tax return from your PC if you use it for editing photos. There are some limits to this, and to avoid tax evasion cases it is a good idea to contact a tax consultant. 

 

Deductions are, by far, the biggest advantage freelancers get over their employed counterparts. This can be seen as compensation for the necessity of filing taxes themselves.

Mixed Income

When freelancing alongside your day job, it is still necessary to submit a self-assessment form. In this case, your allowance is deducted from your total income. Your employer pays part of the NIC according to the salary. The rest you pay as a sole trader, according to the income band you fit.

IR35

The IR35 rule ensures that freelancers pay the same taxes that the equivalent employee would pay. This makes it illegal to use freelancer status to avoid taxes. The rule changed in April 2021, making the hiring firm responsible for the correct taxation. This rule only applies in certain cases, where the contractor is considered a deemed (hidden) worker.

Summary

A sole trader always has more freedom than an employee in the company. It appeals to many people. However, freedom and opportunities come along with more responsibilities. This article only serves as a starting point and does not provide any financial or legal advice. However, if you have the necessary education and expertise in this sphere and don’t mind helping freelancers or companies with taxation issues, you can find a tax officer job on Jooble – a website with thousands of relevant vacancies.  For detailed information, consult your tax adviser and see the updated information in the governmental resources.  

According to Jooble data, in October 2021, employers posted 8569 vacancies for freelancers. In November, this number already constituted 15755 which is 82% more than during the previous month. As we see, the popularity of such jobs is increasing among employers. Moreover, to get some tasks done they don’t just check numerous freelance websites but also post vacancies on the job boards. If you want to find a job as a freelancer, look at the opportunities in the following cities: London, Manchester, Birmingham, Bristol, Sheffield, Liverpool, Leicester, Nottingham, Wigan, Oxford, Ipswich, Cambridge, Sunderland, Norwich, and Bath.

However, the number of freelance vacancies posted on Jooble in October and November (24414) is only about 0,07% of the total number of vacancies British employers published on the job board during the last autumn months. To be precise, there were 35 767 725 vacancies posted.  As we see, there are plenty of options to find a job that suits your aspirations and experience .